This points up what I was complaining about with yesterday's post. Obama's budget projections seem little better than random guesses--well, not random, because the errors all go one way:
The administration predicted that the overall economy, as measured by the gross domestic product, will shrink by 1.2 percent this year but will grow by a solid 3.2 percent in 2010. That growth would be followed by even stronger increases of 4 percent in 2011, 4.6 percent in 2012 and 4.2 percent in 2013.By contrast, the consensus of forecasters surveyed by Blue Chip Economic Indicators in February predicted that the GDP will fall by a larger 1.9 percent this year and then increase at weaker rates of 2.1 percent in 2010, 2.9 percent in 2011 and 2012 and 2.8 percent in 2013.
Nariman Behravesh, chief economist at IHS Global Insight, a major private forecasting firm, called the administration's forecasts "way too optimistic" and said it could represent a return to the overly optimistic forecasts of previous administrations confronted by surging budget deficits.
"They used to joke during the Reagan years that the highest ranking woman in the administration was Rosy Scenario," he said. "We may be seeing a return of Rosy Scenario."
If you take Ken Rogoff seriously, even that's far too optimistic; he says that the decline after a financial crisis generally lasts about two years, which means that growth won't resume until 2011. The current deficit is stunning, but supposed to be temporary--that's presumably why Obama can ignore the deficits dedicated to stimulus and still propose hefty increases in government programs. That's looking less likely by the day.
And once again, we find out that when The One is in charge, The Others will suffer.
After new twelve year lows in the indexes this morning, you have to wonder what other figures are being skewed. Is the Plunge Protection Team still in action manipulating market prices?
Just wait until the CPI numbers get revised upwards. I take little pleasure in predicting a continued torrent of bad news.
Instead of starting from your political base, take a look at the components of GDP.
Much of the quarterly GDP decline came from falling energy prices. The reduction in energy spending between 3rd and 4th quarter totaled 68% of the total decline in quarterly GDP. Add in declining spending on food, which also benefited from falling commodities prices, and you're up to 85.4% of the total decline in GDP during the quarter.
This is a math issue. Those energy and commodity price declines are clearly not sustainable. Unless you believe that oil is going to be 50 cents per barrel and that they're going to start paying you to eat wheat, it wouldn't be too smart project to project that assumption forward into perpetuity.
Let it be frankly stated that these people are lying, lying, lying, just as the previous people were lying, lying, lying.
Why anyone listens to a President give a speech is beyond me. It's like spending an hour watching a three-card monte dealer, except the shills are more numerous.
RW,
Wow - that is a brilliant point!
Good work.
Common conventions for expression of rates of change are horrible. Sometimes we throw in the word "annualized" or the mysterious "APR" but often we leave it out -- see the big text of any bank advertisment for a CD rate. Lots of statmens are highly ambiguous if not outright wrong -- for example, your headline, which says that GDP fell 6.2% in a quarter when in fact it fell 6.2%/4=1.6%.
Just take a cue from real scientists and use proper units. GDP fell 6.2%/a in the fourth quarter. There, fixed that for you.
Unless you believe...they're going to start paying you to eat wheat...
I don't see why we should rule that out of our assumptions. After all, doing so has a GDP multiplier of at least 1 because it's income to me, so it should work fine as "stimulus," right?
But as jmo said, good point. And yet another reason why I think we measure GDP the wrong way (not that I have a better idea).
That's where the decline in spending went, yes. However, normally if the prices of food and energy decline, consumers spend the money that they saved on food and energy on something else, and vice versa. They didn't.
That argues that people had less money to spend as well. Some of that is the savings rate finally going up, but some of it is people having less money.
Wait, are you saying that we're going to have inflation or else just food and energy price increases, and that will be a good thing because nominal GDP will increase?
I take the reverse view; the decline in energy and food prices is a good thing for consumers, and things would be worse without them. The fact that people didn't spend their savings from gas and food on other things is reflective of the weakness in the economy. If it were just relative prices going down, then expansion elsewhere would counteract the decline in food and energy.
In other words, I believe that GDP would have declined by about the same headline number, but consumers would have felt the pinch more had energy and food prices not come down.
I recognize that the longer Obama is in office and "owns" the economy, the role of Pollyanna will switch to Democratic supporters. (Personally, I'm amused that now Megan saying that the economy is worse than we thought and hoped now makes her a Republican hack. Huh?)
It does seem a bit contradictory for President Obama on the one hand to say that the economy is so absolutely terrible, and yet on the other hand claim that it will recover faster than anyone thinks so that he can massively increase spending and still have worse deficits than Bush after a projected nine years of uninterrupted growth between 3% and 4% from 2010 to 2018.
And yet another reason why I think we measure GDP the wrong way (not that I have a better idea).
Any stimulus plan needs to take this into account. Which is why I propose that we subsidize the sale of US-built SUV's, to be financed by lenders that received TARP funding, followed by a plan to bolster rampant excess driving, with the goal of increasing world oil prices dramatically.
This plan has many benefits: More jobs for Detroit, along with a chance to get our Detroit bailout money repaid; more climate change that can be fixed with new infrastructure and research spending; and greater GDP from durable goods and the energy spending that flows from this.
Thanks to this plan, everybody who isn't a snail darter is a winner. And anyone who isn't a winner can qualify for some of that terrific government cheese. (Now that's good eatin'.)
On a serious note, GDP over the next quarter or two might be carried on the backs of rising medical costs and some increases in energy prices. Funny how the math can play tricks on us.
Cripes Megan, just yesterday (and your very previous post) the Obama administration was being devious for putting in pessimistic numbers "to allow them to deliver upside surprises," and now they are being too optimistic.
A little coherence, please.
Considering all of the excellent advisors the President has surrounded himself with, surely his forecasts are correct.
Wait, are you saying that we're going to have inflation or else just food and energy price increases, and that will be a good thing because nominal GDP will increase?
The only person talking about "good" or "bad" here is you. We're talking about the components of GDP and how they impact the calculation, which makes this a math discussion.
It's kind of a no-brainer mathematical point -- energy prices aren't going to keep falling to such an extent that they will drive further reductions in GDP of this magnitude, assuming that the rest of the economy doesn't dive into some abnormal freefall.
We just had a massive oil and commodities bubble collapse in short order. The result is skewed by the fact that the bubble popped toward the end of the 3rd quarter, causing Q3 to be a high priced quarter and Q4 to be a relatively cheap one. That's just arithmetic fortune, and it makes no sense to project it forward into future quarters.
I take the reverse view; the decline in energy and food prices is a good thing for consumers, and things would be worse without them.
How is that a "reverse view"? I am pointing out what happened in the arithmetic of the calculation. It fell that dramatically because those things got cheaper, and one cannot expect this feat to be repeated. It's math, not politics.
By the way, this is Bush's decline -- you may recall that he was president during the entirety of the fourth quarter -- so I gain no political brownie points by telling you that it wasn't quite as bad as it looks. This isn't politics, it's math.
If it were just relative prices going down, then expansion elsewhere would counteract the decline in food and energy.
It doesn't need to "counteract" anything. The numeric result is a substantial short-term change in a couple of categories that won't likely be repeated.
Yeah, when energy prices plunged in the mid 80s, there was no corresponding decline in GDP.
I remember someone telling me NotMyPresident is rearranging deck chairs on the Titanic.
I said it's worse: he's punching holes in the hull to make sure everyone gets an equal amount of water.
He laughed. Ruefully.
I think the point is that the numeric result can be sustained, even if the energy/food price decline is not, since there are other variables, and the fact the money saved on energy/food was not spent elsewhere suggests that the numeric result may well be sustained.
Rising commodity prices may increase GDP, but they will also increase CPI.
We are experiencing stagflation and any it is getting increasingly hard to hide that fact.
I think the point is that the numeric result can be sustained, even if the energy/food price decline is not, since there are other variables, and the fact the money saved on energy/food was not spent elsewhere suggests that the numeric result may well be sustained.
Then you need to base that presumption on something more tangible, because the largest pieces during the last quarter were short-term and momentary changes.
The GDP calculation in not particularly outrageous if you look at what GDP is. If you assume the following and understand what comprises GDP, it isn't hard to see why the forecast could lie within the realm of reasonableness:
-Government spending will increase substantially (they just passed a stimulus, so we know that this will happen)
-Energy prices will increase at a rate above the CPI (overcorrection of the bubble will lead to more money devoted to paying for energy)
-The decline in durable goods spending will start to bottom out
-Health care costs will continue to outpace inflation
Combine that with sluggish consumer spending and investment, and you can end up with a decline of that magnitude -- shrinking, but not to the extent of the fourth quarter. Unless you assume nuclear winter, ala Spock, it's not particularly out of line to see 4th quarter as an aberration before removing those two key components of energy and food.
The implication of Rob Lyman's point is a good one -- it's difficult to use GDP in a vacuum, because not all GDP is created equal. A period of GDP derived from increased spending on consumer durables, discretionaries and investment is better than a period with an equal amount of GDP derived from pricing bubbles. We often use this data in ways that it was not intended to be used, because most of us don't look beyond the aggregate figure that's reported in the headlines.
Bearded Spock,
Stagflation - what company or employee is in any position to raise prices/wages?
Since we have no monetary policy left, increasing G (and/or decreasing taxes which will also increase deficits) is the only way we can increase GDP. These numbers would have been worse if G hadn't increased last quarter (see 3rd paragraph of your link). If anything, these numbers tell us that we need to increase G even more. (cf. DeLong, "We Are Going to Need a Bigger Stimulus").
Yes, this means the deficit projections are unrealistic, but deficits are lower on the list of priorities right now.
The whole point of government spending, when done correctly, is to save during the good times, and spend during the bad. We had some minor success in doing this during the 90's when we had a surplus, but unfortunately, besides then we've spent during good and bad times. But, just because we spent during the "good" times (and spent like drunken sailors), doesn't mean we shouldn't spend during the bad times. Two wrongs don't make a right.
So, if the point of this post is to simply point out that deficit estimates are not accurate, then yes, you are right. If you are implying this means we should cut government spending as a response, then you are very wrong. That'd be like saying these number prove we should raise everyone's taxes.
The whole point of stimulus spending is based on the idea that GDP is below its potential. If it turns out its even lower that thought, then we should increase the stimulus, not lower it.
So whether you want to increase spending, decrease taxes, or both, in response to the recession, either way, you will have to accept an increase in deficits as the trade-off.
Oh, I really don't disagree, RW. My comments were more in the vein that economic forecasting is so tenuous that it barely qualifies as forecasting.
In a normal economy, if energy prices dropped in half, there would be a sudden uptick in sales across the board, because it represents a real growth in purchasing power.
Has this happened? There would be a bit of a lag.
Or has the drop in GDP, in spite of the drop in energy prices, plus the other indicators, unemployment for example, shown that the situation is worse than the numbers show?
Derek
These numbers would have been worse if G hadn't increased last quarter (see 3rd paragraph of your link).
To clarify, total government spending declined between 3rd and 4th quarter. Increases at the federal level were more than offset by declines at the state and local levels.
To look at it another way, GDP growth during the quarter, calculated net of food and energy spending, was -0.25%, an annualized decline of 1%. Remove food, energy and government spending from the figure, and the resulting change was about 0.02%, or basically flat.
The "positive" components of the quarter were a dramatic decline in the trade deficit, rising health care costs and more spent on household operations, as well as a change in non-farm inventories.
Except for the health care costs, I can't imagine that the drivers of 2009 GDP are going to display the same dynamics as the Q4 2008 figure, assuming a bottoming of the trade deficit and energy prices, and a lot more government spending. It appears that Ms. McArdle wants to simply on put a multiplier on this 3-month anomalous result, which doesn't make much sense, in my opinion.
I have another way we can boost the GDP. The goverment should pay me to read blogs all day. But to avoid going into deep deficit spending, the government should tax my income from reading blogs at 100%. There we've just boosted the GDP.
I agree with RW. There is too much empahisis placed on this number without a proper understanding of it. If the government pays my neighbor to show up at some useless job -- that increases the GDP. But it results in a net economic loss! My neighbor gives up all his free time and accomplishes/produces little or nothing.
But he receives money that will multiply like little rabbits, right? If putting money in his pocket was the goal, why didn't they just send him a check? Then my neighbor would not have to give up his free time -- he could have worked on his house, played with his kids, read a book. But if its all about boosting GDP, then he better hurry up and start digging holes or something.
That's the biggest guess RW makes dkite, that...
"The decline in durable goods spending will start to bottom out."
....and when we want to lend credibility to our guesses, we call them forecasts. Mind you, I don't know that RW is wrong, just like I don't know that Bearded Spock is wrong.
RW,
Wow - that is a brilliant point!
Good work.
Huh? That was a terrible point, for the reason John and Will pointed out: why weren't drops in energy prices offset by greater consumption elsewhere? So what if they don't continue to fall? Next time, any rises will almost certainly be offset by reduced consumption elsewhere. We're broke. No amount of printing or borrowing can change that.
"The decline in durable goods spending will start to bottom out."
....and when we want to lend credibility to our guesses, we call them forecasts.
You're misunderstanding my point. If we are going to make forecasts, then we need to present the assumptions that are driving our numbers. A slight variation in underlying assumptions can lead to vastly different totals.
I obviously don't know for sure whether durable goods spending will stop plunging or not. However, I am spelling out that my back-of-the-envelope projection calls for that occurring; I'm not just reaching that conclusion arbitrarily based upon a political agenda.
why weren't drops in energy prices offset by greater consumption elsewhere?
Because despite the decline in energy prices, we're having a recession. That should be obvious, even to you.
The issue isn't whether the economy is declining, but the degree of the decline. The food and energy issues obviously overstate the result.
why weren't drops in energy prices offset by greater consumption elsewhere?
Because despite the decline in energy prices, we're having a recession. That should be obvious, even to you.
The issue isn't whether the economy is declining, but the degree of the decline. The food and energy issues obviously overstate the result.
RW, you stupid monkey, the question is: why wasn't the exact amount of the GDP decline caused by lower energy/food prices offset by an equal increase in consumption?
RW, everyone's, and I do mean everyone's, back of the envelope economic projections are heavily influenced by their political ideology. Whether it is arbitrary influence is merely a guess as to other people's inner state of mind. Name the preferred political stance, and I'll name the back of he envelope projections to support the stance. Sure, some ideologies have such a decades long records of failure that it is a lot harder to find those envelopes, such as extreme central planning of the Soviet variety, but when talking about the differences in the common American economic debate, the envelope desired to support what is preferred is sure to be lying nearby.
The myth of objectivity in economics is among the field's most pernicious.
Will Allen,
I agree that back of the envelope calculations/projections (and/or the assumptions that feed into them) are colored by political ideology. In this case, however, RW is making basic errors in logical reasoning. Simply inexcusable.
RW, you stupid monkey, the question is: why wasn't the exact amount of the GDP decline caused by lower energy/food prices offset by an equal increase in consumption?
Wait, wait, wait for it. Insert non sequitur then repeat: "Because we're having a recession, you moron!" Classic RW. I'm sure jmo will be dazzled.
the question is: why wasn't the exact amount of the GDP decline caused by lower energy/food prices offset by an equal increase in consumption?
It's a lame question (which I suppose explains why you asked it.) You're attempting to turn this into a strawman argument, obviously because you don't have a decent one up your sleeve.
Here's the fundamental point -- don't assume that the aggregate changes between Q3 and Q4 2008 are meaningful in constructing a forecast for 2009. You politically motivated boneheads find it tempting, I know, but those of you who actually care about doing the math can easily see that the whole of 2009 is unlikely to replicate the behavior of that one particular unique quarter.
I do mean everyone's, back of the envelope economic projections are heavily influenced by their political ideology.
Perhaps for some. But in my case, I'm assuming that a lot of the bleeding in durables that was going to take place has already occurred due to the credit shakeout, and that a revival of the credit markets will put a floor underneath it.
That's just my view of where we are in the cycle. If I'm wrong, then things will be worse than I anticipate.
Huh? That was a terrible point, for the reason John and Will pointed out: why weren't drops in energy prices offset by greater consumption elsewhere?
How about this? People went into debt when energy prices skyrocketed, so when energy prices went back down they paid down their debt instead of consuming. I would think that a huge spike in energy prices, followed by a huge drop would cause short term changes in consumption that are not a great predictor for the economy as a whole. Especially since we annualize the numbers instead of a direct drop, a short term change could over exaggerate the problem.
Secondly, we really need to start using units. Not every country annualizes GDP, so unless units are provided you can't be sure the author took that into account. Another example an "expert" on the news last night reported that per capita government spending in California went from $1300 in 1990 to $2600 in 2009. This is a major problem if the numbers are inflation adjusted, and not so much of a problem if they aren't inflation adjusted. It didn't say either way, so you can't be sure from the news report. If the numbers aren't inflation adjusted in this case, then the "expert" was misleading. In short, units are critical to making sure we are comparing apples to apples.
In other words, RW, you are assuming a revival in credit markets, and no countervailing variables to offset a revival in credit markets. You might be right, but let us not pretend that your assumptions aren't influenced by your politics.
To given another example of how ideology influences our assertions, examine the source of or recent extremely bitter dispute. Your ideology leads you make the assertion that a economic entity which benefits from an implied taxpayer guarantee of it's liabilities can be accurately labeled "privatized". My ideology leads me to assert that no entity which has it's liabilities implicitly guaranteed by the taxpayer is "privatized".
In other words, RW, you are assuming a revival in credit markets, and no countervailing variables to offset a revival in credit markets.
I'm assuming that the dive in durables spending to date has been so dramatic and quick that it is representative of a technical move -- in this case, a response to the retraction of credit -- that is bound to bottom out if given an excuse to bottom out. It suggests a sort of inverted bubble, a technical decline not driven by fundamentals of demand.
My assumption is that government efforts to coax consumption will be successful, because it has worked before and because the history of the American people suggests that they like to spend a lot of money on stuff that they can finance. That doesn't describe me personally, but that fairly describes a large proportion of the US population.
The only scenarios that I see that would keep this from happening would be a depression or a Super Recession that troughs for years, with no light at the end of the tunnel. I give those possibilities low (although not zero) odds, given US economic history. Politics has nothing to do with how I got there.
FWIW, I also predicted a bursting of the oil bubble elsewhere, and caught a lot of flack for it from liberals and environmentalists, many of whom believe in peak oil theory. I described high oil prices as technical in nature and therefore unsustainable because of my view of the data from the EIA, etc., even though I would personally prefer that people use less oil. Politics may impact your market analysis, but it doesn't change mine.
Yeah, sure, RW you are the objective observer, and the sample size of one oil market call is worth mentioning in support of that notion.
A I have written before, to people who have differing ideologies, but were just as prone to that technique, the writing devoted to evaluating baseball player performance is more empirically sound than that devoted to economic/investment forecasting.
"Bearded Spock,
Stagflation - what company or employee is in any position to raise prices/wages?"
The government is, jmo. Carbon cap and trade. Income tax on the wealthy. California sales tax, etc. Cigarette taxes. the list goes on.
Monetary inflation is a tax on savers.
Bankruptcy lawyers are in demand, too.
If you take Ken Rogoff seriously, even that's far too optimistic; he says that the decline after a financial crisis generally lasts about two years, which means that growth won't resume until 2011.
The financial crisis started at least in September 2008, so that points to 2010. Arguably, it started in August 2007, which points to 2009.
But, the funny thing about Rogoff's numbers, and those generally used in articles like his, is that they are referring to average numbers (average stock market collapse, average length of recession, average increase in unemployment numbers, etc). That means that if the average financial crisis recession is 2 years, as many are more than 2 years as are less (ok, so that's median and not average, but my statement is still probably, maybe, roughly, correct).
Perhaps more importantly, of all those financial crisis recessions that make up the average, how many occurred when the entire global economy was crashing? How many happened when Japan was entering into a full fledged depression, China's economy was collapsing, Western Europe was in a severe recession, emerging markets were facing severe currency crises that will probably result in substantial debt defaults (which very well may cause Western Europe to enter into a severe depression), etc, all at the same time? This context indicates something far more severe than a recovery in 2009. Or 2010. Or 2011. Or 2012...
God help us all.
Well, sure, I don't think anyone is expecting a 6.2% decline in GDP for the entire year. That would be amazingly bad. Please don't think that I'm saying that. (Unfortunately, people seem to be thinking that.)
I'm just saying that the argument of "don't worry, GDP only went down because the prices in some sectors went down" is not very comforting in general. It's only comforting in a "well, if consumption had to go down, at least it wasn't as painful as it had to be" sense. The fact that gas and food prices will eventually rebound is not of comfort either, even if it increases nominal GDP.
However, as I mentioned in my comment, the idea that a lot of the GDP decline went into a higher savings rate is actually of some comfort.
Yes, GDP decline won't be -6.2% for the year, and I share the hope that that quarterly result is the worst of it.
I agree that it's unlikely to be sustained for an entire year. I just think that you have the causation backwards.
You're arguing that falling prices drive the reductions in GDP, rather than anything like vice versa? For the economy as a whole, not just for the sectors with falling prices? Really?
I would in general put the causation in the other order. People were in debt, some lost jobs, or otherwise felt poor. People cut back on spending, and started saving more if they good. This resulted in, among other things, lower demand for energy and a shift towards eating at home and more cheaply in general.
This resulted in lower prices. (Some of it is substitution of cheaper, perhaps lower quality food for more expensive, not the same exact food becoming cheaper, but it can look like prices declining, and in a sector sense, is sort of true.) Eventually supply of oil will decline to catch up, but it takes a while.
Yes, some food commodities overcame some seasonal fluctuations and became cheaper in general thanks to higher production. But that makes us wealthier in general, not poorer. It doesn't decrease GDP so much.
I would agree that eventually, if GDP falls too much, energy prices will become so cheap that that will help the economy; it's a negative feedback cycle to be sure. But you have the causation strongly backwards here.
You're arguing that falling prices drive the reductions in GDP, rather than anything like vice versa?
Argh. No, I am illustrating that the **arithmetic** of GDP turns declining prices into a negative. We are talking about addition and subtraction here, and what I've stated is simply a mathematical fact. Dramatic spikes in prices increase GDP, plummeting prices decrease GDP. That is a quirk of the formula.
If there is to be a stimulative effect to declining oil prices falling so quickly, it is highly unlikely to show up in the same quarter. The market needs to wrap its collective head around the change in circumstance and make appropriate judgments. (It probably also wouldn't hurt if consumers and businesses weren't nervous about spending, and could obtain credit.)
I'm just saying that the argument of "don't worry, GDP only went down because the prices in some sectors went down" is not very comforting in general.
That's great, because I am not trying to comfort you. I am simply pointing out the mathematical anomaly of the quarter that creates an anomalous figure for Q4 2008. You are trying to elevate it into same grand philosophical statement, when I am describing an arithmetic fluke that explains that period in time.
I would agree that eventually, if GDP falls too much, energy prices will become so cheap that that will help the economy; it's a negative feedback cycle to be sure. But you have the causation strongly backwards here.
OK, let's understand this -- you are the only person talking about causation. I am talking about something far more basic, called arithmetic, which explains why big numbers got smaller during the quarter.
GDP is defined as the total amount of spending in a variety of subcategories that comprise consumption, investment, government spending, imports and exports. Go ahead and look at the BEA's charts if you'd like to see the details.
Here's the math: The big oil number got smaller, so GDP related to consumer energy spending went down a lot. The cost of commodities plummeted, so the big retail GDP food number got smaller, too. You know why the big numbers got smaller during that period -- the commodities bubble took a nuclear detonation last September. (Well, Clay doesn't know, but he can't grasp these things, poor thing.)
Well, sure, I don't think anyone is expecting a 6.2% decline in GDP for the entire year.
Well, I sure wouldn't, because I looked at the data, can see how the math works, and actually anticipated back when the bubble burst that this little math fluke would show up in the Q4 numbers.
But on the other hand, Ms. McArdle, who apparently wanted to use this story to critique the new administration's 2009 GDP forecast without actually looking at the detail that caused this Q4 bomblet, opted to use this factoid to imply something that she could not support, when a few minutes spent looking at the data backing the report would have made this obvious.
I am not sanguine about the numbers, by any stretch of the imagination, but I am explaining to you how the math impacts this quarter's data. You are trying to take that simple point to places that I did not go, and drawing conclusions about causation that I never made.
Instead of rank incompetence or shameless hackery, you could figure out that the grownups realize that price fluctuations can have significant effects on current dollar GDP figures, and have therefore kindly given us real GDP figures, such as -6.2%. The rest of us, and all news reports, figured this out quite a while ago. Hint: you want to look at the RIGHT side of Table 3, which is in "chained (2000) dollars," and not the left side that you looked at, which is "current dollars." You may even see that spending on energy nondurable goods went UP in real terms.
No, you didn't, and no, you can't.
You might want to spend more than a few minutes next time.
The first smart thing you've said all day.
Well, sure, I don't think anyone is expecting a 6.2% decline in GDP for the entire year.
But, Ms. McArdle's point was that because of the 6.2% decline the numbers are too optimistic. She is trying to forecast based on Q4 data when it is in all likely hood a unique quarter.
Hi -
I was in the process of downloading the release from BEA when I saw Ben's post. Ben, thanks! You saved me the trouble...
This is an excellent example of how not knowing economics can really ruin a line of argument. RW is looking at the nominal numbers, which is fine if you want to include prices in your arguments: economists look at what we call "real" numbers, which don't hide behind price changes, but rather show what is really happening.
And for those making fun of forecasters: you don't have a clue about what you're talking about. While you can certainly have specification bias in developing econometric models, serious forecasters want to do one thing only: be as accurate as possible. Anything else means you won't be working in the field for long.
And yes, I'm in the forecasting business, and have been so for over 20 years.
And the link to my blog is correct in this post.
With a 6.2% annualized decline in 2008Q4, there is also a basis effect that makes growth out of the whole that much more difficult. A sudden decline or increase in the final period of a year always has this effect...
Wow. So not only was RW's original point weak even assuming his numbers were correct, but he's an even bigger fraud than we realized because he was looking at the wrong figures the entire time, comparing real rate of decline with nominal decrease in energy expenditures.
I know I'm being childish rubbing it in ... but ouch. Thanks for actually checking the stats, Ben.
Anecdotal, but everything is aggregated anecdotes. As long as the data is real.
Yesterday got a service call from a local manufacturer. Their environment box quit. They manufacture electronic components, wiring harnesses, for the automotive market. Their customers are diversified within that sector.
Small company, hence anything is reflected immediately in employment and production.
Before christmas, they had a full order book, looked good. Over the next two weeks almost all was cancelled. They laid off some people, cut hours of the rest, shut down lines 1,2 days a week.
Yesterday, friday which is the day they shut down production they were operating. No shutdowns for the next 3 weeks. Orders to fill. Not boom times, but for the moment better.
Derek
Yes, but you would argue that a 3.8% decline was a unique quarter as well (and would be right). All things being equal, I don't see how a downward revision from -3.8% to -6.2% would do anything other than make you revise your future expectations down, even slightly.
The logic is simple Bayesian updating. Things are worse than we thought. Therefore, the near future is likely to be worse than we thought. That's reasonable even if Q4 is the bottom and a uniquely bad quarter.
A little knowledge is a dangerous thing.
Obviously a changing overall price level-- what we call inflation-- can affect GDP numbers given in current dollar terms. Luckily, that's already taken out in the real GDP numbers Ms. McArdle is discussing.
That quirk is exactly why we use real GDP, i.e., inflation-adjusted.
I'll struggle to be polite, but you're being awfully rude and condescending (Clay doesn't know, but he can't grasp these things, poor thing) for someone who is almost completely ignorant of the issues and can't read a table properly.
When real GDP declines, there's no "upside" to it being because prices declined in one sector. Those price declines are already accounted for. We did spend less in energy and food in current dollar terms, but in real terms, actually spent more on energy. There were real savings in food, mostly in eating out less, eating cheaper food, etc.
Well, let me say I'm another one of those people who are struggling to be polite with those who can't be bothered to look up (dis)confirming data. And looking that data, it looks like it's easy to find article after article after article in which energy prices fell, not just here, but world-wide:
There are thousands of these sorts of articles. So something is wrong in your assumptions on how to read the table. Perhaps what is happening is that though there were worldwide declines in energy prices and production, the American dollar fell even further than this decline, making relative expenses higher. If that is the case, then RW is indeed correct. Certainly his version agrees with my recollections.
Doesn't anybody read any sort of trade magazine? I'm an evil liberal/leftist/socialist/commie to here others tell it, and even I read business articles now and then. You'd think the red-blooded capitalists would be doing the same on a daily basis.[1]
[1]I've been thinking about putting a small amount of money into the alternative energy business, what with the political and economic crisis being what it is. I'm particularly interested in commercial applications of thermal depolymerization. And here is the wiki entry. I've never done any directed investing before (I'm a play-it-safe mutual funds/gov. bonds for education sort of guy), but if you're thinking about doing this sort of thing, there are probably millions of pertinent articles - like the declining price of oil on the open market in the fourth quarter of 2008 for instance.
Apologies for the poor formatting. I also had to cut a few links out before this would go through, so cites available upon request.
At any rate, John, it would behoove you to collect the data before making comments like the above, given that energy prices did indeed fall worldwide. And those decreases are unsustainable, as RW rightly points out. As for being condescending, well, I've been accused of that myself. From my side, it's not condescension, but impatience with people who won't do basic fact checking. It's as if one of my students came up with a linear formula for predicting decreases in production of motorcycles when the problem itself clearly states that production has been increasing, and here are the data points.
ScentofViolets, sigh.
You're another one who is failing to do basic fact checking, or even understand RW's argument.
Yes, the price of food and energy declined, even in real terms. Page 12 of the PDF shows that (Appendix A), as you can compared the price index of purchases including and excluding food and energy. Prices declined sharply when including food and energy, and increased slightly overall. But that didn't make the GDP numbers lower. The lower prices made GDP higher, as I claimed.
Look, the numbers are on page 6 of the PDF. Personal consumption expenditures on "gasoline, fuel oil, and other energy goods" contributed 0.28% to GDP from Q3 to Q4 in 2008 (annualized) (real, adjusted for inflation.)
The point is that the lower prices did not do what RW or you are claiming. It did not make the nominal GDP figures lower. It contributed to GDP. Lower prices for energy made the US wealthier and real GDP higher than it would be otherwise, exactly as I said. RW claimed that lower energy prices would somehow "not show up" in additional GDP until the future. This is entirely false.
As the page demonstrates, it's completely ridiculous to claim, as RW did, that the expected rebound in energy prices will raise real GDP. IT WILL NOT. Particularly when we import so much energy, energy getting dearer makes us poorer and makes the real GDP numbers looks worse.
We had less money. Thankfully, since energy cost less and we import energy, the decline in energy prices made the real GDP growth in Q4 look better than it would have otherwise.
RW is entirely the opposite of correct. If energy prices rebound (and I agree that this is likely), that will make GDP worse in the future.
Looks like RW was shamed into silence and the usual suspect took up his witless mantle.
John, I wouldn't even bother ... at least until RW returns to proclaim his unique genius into all things economic, and that we're all just unwilling or unable to recognize the profundity of his insight.
Sigh. Yes, John, I looked at the tables before posting, all of them. I also did a little outside research, unlike certain other people I could mention by name. And - as usual, big surprise - I find that when a rather unusual statement by the market uber alles crowd gets made, it turns out to be dead wrong, and my suspicions are correct. In this case, that you don't know that there isn't a direct causal relationship between how much of what gets produced and how strong or weak the dollar is. When the demand for oil, gasoline, jet fuel, etc falls, internationally, less is produced (you do know that the U.S. exports petroleum products . . . or maybe not, judging from your posts), regardless of the strength of the dollar. You seem to think that if the dollar appreciates, the amount of refined oil has increased, even if the number of barrels remains the same.
Oh, and yes, the amount of petroleum products produced decreased by a largish amount. An unsustainable decrease, most people in the biz think, and you should know if you would bother to pick up the paper from time to time.
So, one more time, and just to fill the gaps in your education, GDP could increase and the dollar weaken, GDP could increase and the dollar strengthen, GDP could decrease and the dollar weaken, and GDP could decrease and the dollar strengthen. Ditto for actual production values. This is basic macro and basic numeracy. But we musn't let those get in the way of attempting to score a point for the team, eh?